Retirement Planning With Health Care Expenses in Mind

As you save for retirement, you also recognize the possibility of having to pay major health care costs in the future. Is there some way to plan for these expenses years in advance?

There’s no rote answer, of course, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly.

Since 2002, Fidelity has projected average retirement health care expenses for a couple (assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other). In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 to absorb those future costs and in 2017 Fidelity projects this cost at $275,000, up 70% from its initial estimate in 2002. 1,4

When Fidelity asked Americans aged 55-64 how much money they thought they would spend on health care in retirement, 48% of the 2013 respondents figured they would need about $50,000 apiece, or about $100,000 per couple. That pales next to Fidelity’s projection of $220,000 and it also falls short of the estimates made back in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.1

AARP posed this question to Americans aged 50-64 in the fall of 2013. The results: 16% of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42% figured needing less than $100,000. Another 15% admitted they had no idea how much they might eventually spend for health care. Unsurprisingly, just 52% of those surveyed felt confident that they could financially handle such expenses.1

Prescription drugs may be the #1 cost. EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75% probability of paying off 100% of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.2

What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.2

The main message: save more, save now. Do you have about $200,000 (after tax) saved up for the future? If you don’t, you have another compelling reason to save more money for retirement.

Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare covered about 62% of retiree health care expenses. While private insurance picked up another 13% and military benefits or similar programs another 13%, that still left retirees on the hook for 12% out of pocket. 1

Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids - and it certainly doesn’t pay for extended long term care. Costs vary widely depending on location. In 2017, the median annual cost of a private room in a nursing home was $155,125 on Long Island, N.Y.; $182,318 in San Francisco; and almost $126,000 in Naples, Fla.—far pricier than the median $74,000 in the Dallas area. 2,6

Medicare’s yearly Part B deductible was $147 for 2014. Once exceed recipients have to pick up 20% of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. The standard monthly Part B premium was at $104.90 in 2014, which comes out of Social Security. For retirees earning income of more than $85,000, the monthly Part B premium will be larger (the threshold for a couple in 2014 was $170,000). Part D premiums (drug coverage) can also vary greatly; the greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums is only wise each year.2,3

Underlying message: stay healthy. It may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96% of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77% of that end salary - about $61,600 - to cover 100% of annual retirement expenses. Current data show that Americans with specific medical conditions, such as type II diabetes or high blood pressure, have some control over their longevity and health expenditures if they actively change behaviors and follow prescribed treatments. Those who manage their conditions can extend life expectancies, save money, and offset future medical expenses. The Case Study shows how a 50-year-old with type II diabetes can live eight years longer – and increase annual in-retirement income by almost $17,000 – by making specific lifestyle changes and following diabetes-care protocol. 1,5

Home-based care is vastly preferable for most people. But it can cost four times as much as assisted living, with the national average at $180,000 a year, according to HealthView. That’s on top of costs incurred to modify the home—such as wider doorways and ramps to accommodate wheelchairs, or grab-bars in the shower—as well as whatever additional help is needed to maintain the home. HealthView Services’ 2017 Retirement Health Care Costs Data Report shows retiree health care expenses will rise at an average annual rate of 5.47% for the foreseeable future – almost triple the U.S. inflation rate from 2012-2016. The compounding impact of health care inflation means that health care costs will be one of the most significant expenses in retirement.5

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